Putin’s “Power Vertical”: Blanchard and Shleifer Revisited

In 2000, Olivier Blanchard and Andrei Shleifer wrote a seminal paper comparing the impact of federalism on economic development in Russia and China. Blanchard and Shleifer aimed to solve the puzzle of why federalism–and, in particular, inter-jurisdictional competition–fostered economic growth in China but hampered it in Russia. Simplifying somewhat, their key conclusion was that the absence of political centralization in Russia was the culprit. With no strong national government to act as a disciplinarian, Russian localities were prone to a particular form of corruption–capture by local special interests–and localities competed for rents instead of competing for firms by making improvements we associate with open governments and economies. In Meng’s recent post about political decentralization in China, she endorses Blanchard & Shleifer’s analysis, and advises against granting Chinese regional and local governments more autonomy from the center. Implicitly, her post is a caution against moves that would make China in 2014 look like Russia looked in 2000.

But what about Russia? Fourteen years after Blanchard & Shleifer wrote their paper, political centralization is a reality in Russia — in terms of the strength of the ruling party, Russia resembles China much more closely now than it did in 2000.  So one might expect, if Blanchard & Shleifer’s analysis were correct, that local corruption in Russia should have abated, and competition between Russia’s different regions should now be growth-promoting rather than growth-retarding.  Alas, Russia’s experience over the past 14 years suggests that this has not come to pass.

Over the past decade, Putin has recentralized power in the national government and created a “power vertical.” For example, Putin abolished the democratic election of governors in 2004 and now appoints regional governors – a power that the Communist Party in China has long enjoyed, as Blanchard & Shleifer highlighted. Concurrently, United Russia (Putin’s party) has strengthened party discipline in a top-down manner so that party members in regional and local governments toe the national party line — another feature that Blanchard & Shleifer (and Meng) concluded caused inter-jurisdictional competition to be good for growth and governance in China (though recent research has called this conclusion into question in China as well).

Under Blanchard & Shleifer’s framework, now that Russia has the missing ingredient — a strong national party with the ability to discipline local officials — we should see localities competing in “market preserving” ways instead of in corrupt ways. However, corruption in lower levels of Russian government has not abated, and, as Alexei Navalny, among others, have revealed, the problems of rent-seeking and government capture remain–indeed, they may have gotten worse.

Russia’s experience in the age of Putin’s “power vertical” suggests not that Blanchard & Shleifer were wrong, but that they drew too broad of a conclusion from the comparison between Russia and China’s development. The missing ingredient is not just political centralization. It is political centralization by a government that is committed to economic development and open markets. Blanchard & Shleifer themselves seem to acknowledge that the predictive power of their thesis is limited. At the end of the article, they identify President Calles’s centralization of power in Mexico in the 1930s as an “instructive…example” for Russia. President Calles first brought regional leaders under his control, and then oriented regions toward economic growth. Russian leaders have accomplished step one. They have yet to accomplish step two.

When cast this way, it seems that Blanchard & Shleifer’s analysis shows that the combination of top-down political control and inter-jurisdictional competition is good for growth and anti-corruption only if the national government decides to use its centralized political power to discipline local leaders who engage in corrupt or economically inefficient behavior at the expense of the larger nation. If the national government does not make such a choice, then political centralization might not cause local governments to choose open development over corruption.

1 thought on “Putin’s “Power Vertical”: Blanchard and Shleifer Revisited

  1. Very nice analysis Anna.

    One question it invites for me is WHY the Russian central government (that is, Putin and his cronies) hasn’t taken the second step of pushing leaders to promote economic growth, reducing local corruption, etc.

    The answer that initially springs to mind is that Putin has no interest in doing this, because the corruption at the local level benefits him too — illicit wealth can be (and almost certainly is) channeled upwards. But that’s not a wholly satisfactory answer, because the same could be said of other centralized systems, like China. Often the kleptocrats at the center want to stamp out “freelance” local corruption, promote investment and growth, and then appropriate a bigger share of a bigger pie for themselves. But maybe Russia is different in some way? Perhaps the presence of vast natural resource wealth reduces the government’s incentives to promote other kinds of investment and growth (the political version of the famous “resource curse” problem)?

    Another possibility is that Putin and his coterie are not as all-powerful as they seem; maybe they are still dependent (or think they are) to local-level elites? If that were the case, the center might be less inclined to use its power to punish local political or business elites who engaged in widespread corruption. Or perhaps these elites can use their ill-gotten wealth to secure their own promotion in, or protection by, the central party apparatus?

    I’d be curious if you or others have thoughts on why Russia has taken the path it has.

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